Outsourcing inventory management: Save time and reduce costs for your small business

Published Monday 3 November 2025

Table of contents

• Simplifying your inventory
• What is outsourced inventory management?
• What could you outsource?
• Types of inventory management outsourcing
• The pros of outsourcing inventory management
• The cons of outsourcing inventory management
• When to consider outsourcing inventory management
• How to choose an inventory management partner
• Getting started with inventory management outsourcing
• Take control of your business growth
• Frequently asked questions about outsourcing inventory management

Key takeaways

• Evaluate your current inventory challenges such as overstocking, understocking, and storage costs to determine if outsourcing could free up cash flow and reduce operational complexity.

• Choose between third-party logistics (3PL) for maintaining control over production while outsourcing fulfillment, or dropshipping for a hands-off approach where suppliers handle everything from storage to shipping.

• Test outsourcing with a pilot product line for 3 months to measure financial impact, service quality, and scalability before expanding to your full inventory.

• Prioritize integration capabilities and location proximity when selecting an outsourcing partner to ensure their software connects with your systems and warehouses are positioned for fast customer delivery.

Simplifying your inventory

Inventory management balances predicting demand with managing stock levels. Getting this balance wrong creates costly problems for your business.

Common inventory challenges include:

• Overstocking: excess inventory ties up cash and requires discounting to clear
• Understocking: lost sales when products aren't available
• Storage costs: warehouse space, staff, and equipment expenses
• Time drain: managing inventory takes focus away from growing your business

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Many businesses outsource inventory management to save time and reduce complexity. This guide explains how outsourcing works and helps you decide if it's right for you.

What is outsourced inventory management?

Outsourcing inventory management means another company stores, tracks, and ships your products for you. Instead of managing a warehouse and packing boxes yourself, you partner with a specialist who does it for you.

Your partner can receive goods from your manufacturer and deliver products to your customers. This frees you from daily logistics so you can focus on growing your business.

What could you outsource?

Inventory management outsourcing lets you hand over specific operational tasks to specialized companies. Here's what you can outsource:

• Demand forecasting: often best kept in-house since you know your business and customers
• Purchasing and ordering: timing orders and managing supplier relationships
• Warehousing: storage, organization, and inventory rotation
• Staff management: hiring and training warehouse workers
• Fulfillment: picking, packing, and shipping orders to customers

Most businesses keep demand forecasting in-house because you know your customers best. The other steps are often outsourced to save money and reduce complexity. For example, the U.S. federal government spent $307 billion to acquire services in one year.

Good point-of-sale (POS) software and careful analysis of your accounts and receipts can help. You can learn more in our guides about point-of-sale retail software and efficient inventory management systems. Your knowledge in this area helps your business stand out.

Many businesses outsource these parts of inventory management to save time and money. You can do the same if it fits your needs.

Types of inventory management outsourcing

When you decide to outsource, you have a few options. The two most common models are working with a third-party logistics provider or using a dropshipping service. The right choice depends on how much control you want to keep and how your business operates.

Third-party logistics (3PL) and fulfillment services

Fulfillment outsourcing means a third-party company handles storage, packaging, and shipping while you focus on production and sales.

For example, if you manufacture small, non-perishable products that ship by standard mail, you can use a fulfillment service.

Your responsibilities:

• Production planning: decide what to make and quantities needed
• Manufacturing: create your products
• Shipping to fulfillment center: send finished goods to your outsourcing partner

Outsourcing company handles:

• Storage: warehouse space and inventory organization
• Order processing: picking and packing customer orders
• Shipping: delivery and order tracking
• Reporting: inventory levels and fulfillment metrics

This approach removes the need to manage a warehouse and lets you focus on making and selling your products.

Dropshipping

Dropshipping is a business model where a supplier handles your entire inventory process. You never touch the products you sell.

Here's how dropshipping works:

• You: market products and process customer orders
• Dropship supplier: stores inventory, packages orders, and ships directly to your customers
• Customer: receives products with your branding and return address

With this model, you only buy inventory after you make a sale. The supplier usually pays you a commission for each sale.

The pros of outsourcing inventory management

Outsourcing inventory management offers significant advantages for growing businesses:

****Cost savings:****

• Reduced overhead: eliminate warehouse rent, utilities, and insurance costs
• Lower staffing: no need for warehouse workers, forklift operators, or inventory managers
• Flexible expenses: pay only for space and services you actually use

Operational benefits:

• Faster fulfillment: dedicated companies often ship orders same-day or next-day
• Advanced technology: integrated systems connect with your sales channels and automate processes
• Professional packaging: consistent, branded presentation for all shipments

Business growth advantages:

• Easy scaling: handle increased order volume without expanding facilities
• Reduced inventory risk: less money tied up in stock that could become obsolete
• Focus on core business: spend time on product development and marketing instead of logistics

Economies of scale: Outsourcing companies serve hundreds or thousands of businesses, giving them significant buying power you can't achieve alone.

Cost advantages include:

• Warehouse rates: bulk rental agreements reduce per-square-foot costs
• Shipping discounts: volume-based pricing from carriers
• Equipment sharing: forklifts, packaging systems, and technology costs spread across many clients
• Staff efficiency: specialized workers handle multiple accounts

These savings often mean you spend less overall compared to managing inventory in-house. A government report on strategic sourcing found that leading companies reported saving 4-15 percent on services annually by moving to an outsourced, aggregate approach.

The cons of outsourcing inventory management

Keep these considerations in mind before you outsource your inventory management:

Control and oversight risks:

• Shared control: your outsourcing partner manages fulfillment, so clear communication is important
• Data sharing: you and your partner share sales information to ensure smooth operations
• Quality standards: you remain responsible for customer satisfaction, so choose a partner who meets your standards

Business relationship challenges:

• Profit margins: dropshipping suppliers may offer different commission rates, so compare options to find the best fit
• Service costs: compare outsourcing fees with your current expenses to see if you save money
• Clear communication: set agreements with your partner about who manages customer relationships

Customer experience considerations:

• Brand standards: work with your partner to maintain your brand in every shipment
• Customer updates: decide who will contact customers about shipping and delivery

When to consider outsourcing inventory management

If you recognize any of these signs, it may be time to consider outsourcing your inventory management.

• You need more storage space for your products
• You want to spend less time packing and more time growing your business
• You want to speed up order fulfillment and improve customer satisfaction
• You want to expand to new markets but need better logistics
• You want to simplify inventory management and reduce errors

How to choose an inventory management partner

Choose your inventory management partner carefully. Consider these factors:

• Integration: check if their software connects with your ecommerce platform and accounting software
• Pricing: review their full fee structure, including setup, receiving, and returns
• Location: choose a partner with warehouses near your customers for fast shipping
• Reputation: read reviews from similar businesses and ask for references

Getting started with inventory management outsourcing

Test inventory management outsourcing with one product line before expanding.

Follow these steps to implement inventory management outsourcing:

1. Choose a pilot product: select one product line to test the outsourcing process
2. Research providers: find companies with software integration capabilities and good reputations
3. Set up integration: connect their systems with your sales channels for real-time tracking
4. Run a 3-month trial: collect performance data on costs, speed, and customer satisfaction

Evaluation questions:

• Financial impact: are total costs lower than in-house management?
• Service quality: do fulfillment speed and accuracy meet your standards?
• Scalability: can this provider handle your growth plans?
• Competitive advantage: how does this change your market position?

Use Xero accounting software to track costs and measure results. If the trial works well, expand to more product lines and keep monitoring performance.

Take control of your business growth

When you outsource inventory, you can focus on growing your business instead of daily logistics. With the right partner and clear financial insights, you can scale with confidence. Xero provides real-time data to help you make smart decisions about your inventory and your business.

Discover how Xero can help you manage your business, not just your books. Start your free trial of Xero today.

Frequently asked questions about outsourcing inventory management

How much does outsourcing inventory management typically cost?

Costs depend on your provider, the services you need, and your sales volume. Pricing may include per-item fees, monthly storage fees, or a percentage of sales. Ask for a detailed breakdown to see the full cost.

What happens if my outsourcing provider makes mistakes?

Reputable providers have policies for errors, such as sending the wrong item or damaged goods. Your service level agreement (SLA) should outline how they correct mistakes and compensate for any losses. Clarify these processes before you sign up.

How long does it take to implement inventory management outsourcing?

Setting up inventory management outsourcing can take a few weeks to a couple of months. The timeline depends on how much inventory you transfer, software integration, and your needs. Your provider should give you a clear timeline during onboarding.

Can I switch providers if I'm not satisfied?

Yes, you can switch providers if needed. Your contract will explain how to end the partnership. Plan ahead to make the transition smooth and avoid disruptions.

What control do I lose over my inventory when outsourcing?

Your partner manages your stock and the fulfillment process, so you rely on their reporting and communication. Choose a trustworthy partner who provides transparent updates and meets your standards.